Strong China Demand Seen Pushing Copper Higher in 2011

Copper concluded 2010 with a run of record highs, rising 2 percent on Friday as undimmed demand from China and the prospect of fresh fund investment had analysts pointing to further gains next year.

After a year of divergence for the base metals complex, with tin leading gains at 59 percent and zinc dipping 5 percent, copper is widely expected to build on its nearly uninterrupted rally in the second half of 2010 as ore grades decline, new mines remain scarce and top buyer China grows.

Prices have zipped to record highs in each of the past three days, undeterred by Beijing's Christmas rate hike or the biggest rise in London Metal Exchange stocks since February.

Instead, traders have focused on the steep premium for prompt copper as a signal of tight supplies, and are betting on a handful of new exchange-traded funds to open the door for new investors who had shied away from futures.

"I think it will benefit from backwardation and a tight physical market. That's what we look for when we go long. Copper is pretty much perfect from that point of view," says fund manager Patrick Armstrong of Armstrong Investment Managers, who expects prices to rise another 25 percent.

In its December forecast, Goldman Sachs said it expected prices to hit $11,000 this time next year.

Benchmark copper on the London Metal Exchange ended ring trading bid at $9,960 a ton, securing a 31 percent gain from $7,375 a ton at the close on Dec. 31, 2009. It earlier reached a record of $9,687 on Friday, its third peak in a row.

U.S. copper futures on the COMEX gained 33 percent this year after a 1.9 percent rise to $4.4470 per lb, having logged its latest record high of $4.4520. A sharp drop in the U.S. dollar aided gains on Friday amid trade volume that was about one-third the norm at 12,000 lots.

After a trendless first half of the year, copper prices climbed about 55 percent rise in the second half of the year.

COMMODITIES LEAD THE WAY

The commodities sector — from gold to grains to oil — has been the standout performer in 2010, beating bonds, currencies and shares. While many analysts expect broad gains to continue, some see base metals as among the most attractive.

Harmonic Capital Partners, a $575 million managed futures fund that's among the top performers in its class this year, favors those commodities least able to expand supply quickly over those that have more flexible supply.

"This leads to a view that metals are likely to outperform agricultural commodities," said investment partner Patrik Safvenblad in an interview.

BNP Paribas sees a 500,000 ton deficit in the roughly 20 million ton market next year, and believes that markets are already pricing in tighter conditions.

"What the world is lacking is not new mines per se but new monster mines," said BNP Paribas analyst Stephen Briggs.

Trouble at existing mines has also helped support gains.

Chile's giant Collahuasi mine, the world's third largest, is still searching for alternative export routes after an accident shut down its key Patache port terminal two weeks ago. Officials say it may be shut for a month.

TIN AT TOP

Tin outperformed other LME peers this year, with prices up by nearly 60 percent. Constrained supply from top exporter Indonesia is expected to drive prices to new records, having reached $27,500 a ton in November.

Nickel rose 35 percent for the year in anticipation of a pickup in stainless steel demand, despite stockpiles that remain relatively ample. Stocks hit a record of 166,476 in February, and have since declined some 20 percent.

LME zinc rose slightly on the day to finish the year down 5 percent at $2,440 per ton.

LME aluminum rose toward two-year highs near $2,500 a ton on Friday and ended bid at $2,467 rings, up 11 percent for the year.

Copper concluded 2010 with a run of record highs, rising 2 percent on Friday as undimmed demand from China and the prospect of fresh fund investment had analysts pointing to further gains next year.
After a year of divergence for the base metals complex, with tin leading...